FINANCIAL LIABILITY: Accounting for Lease by the Lessee. FRS 117 : LEASES. DEFINITION (Para 4). Lease is an agreement whereby the lessor conveys to the lessee in return for a payment or a series of payments the rights to use an asset for an agreed period of time. Classification of leases.

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payment of rental over the lease term and plus if any, purchase option price;

excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with:(a)for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or(b)for a lessor, any residual value guaranteed to the lessor by: (i)the lessee; (ii)a party related to the lessee; or (iii)a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee.

ABC enters into a finance lease with XYZ on 1 Jan. 2006 for an item of machinery. The lease terms are as follows:

Lease rental of RM50,000 per year for 5 years, payable in advance and the first rental is due on 1 Jan. 2006.

The useful life of the machine is 5 years with zero residual value. The machine could be bought for cash of RM200,000. ABC adopts a straight-line method depreciation policy for fixed assets. Its financial year ends on 31 Dec.